During the most recent market volatility and the possibility of economic recession that the world hasn’t seen in decades, I couldn’t help but harken back to the prophetic voices of the hip-hop group formed in the early 1990’s, the Wu Tang Clan. "C.R.E.A.M.", the 1994 hit proclaimed that “Cash Rules Everything Around Me”. Yes, I’m going there and am ecstatic to embrace my NY roots and tie the Staten Island native “Wu-Tang Clan” to financial planning principles ;-) Perhaps “C.R.E.A.M.” is a general truth, but for our purposes of financial planning it is a simple reminder of how important a role cash plays in an individual’s asset allocation. Cash is an integral part of financial planning success. An appropriate allocation towards cash can give you comfort during stressful times such as these that we find ourselves in, it can keep you from accessing high interest credit, can tamp down overall portfolio volatility and even give you the option to add to risk assets as opportunities present themselves in market downturns. Cash does indeed rule the decision making process in times of tumult and this period of time is a reminder about how to best situate ourselves for the future when it comes to our individual asset allocations.
One of the first, if not the first question that John or I ask of prospective or current clients is if they have sufficient cash in an emergency fund. A sufficient cash reserve is the building block of all financial planning decisions. How much one should allocate towards a cash reserve is influenced by a couple of different factors: The nature of a person’s work, if their earnings are consistent or varied, if they have multiple earners in the household, and what their monthly expenses are. A good rule of thumb is that you should have in between 3 and 6 months of expenses in an emergency fund. This fund is typically a savings or money market account that you can quickly move into your transactional account with ease and without fee. Having this cushion available should you have a decrease in income due to a downturn in business, reduced hours, temporary layoff, etc. will enable you to maintain your living expenses and give you time to adjust to your situation. The alternative, if you don’t have this additional cash available is that you may find yourself in the situation where you have to pay bills by accessing high interest debt through your credit card or raise cash by selling some of your longer term investments in order to make ends meet. Both of these scenarios could have an adverse effect on your financial situation. Getting yourself into credit card debt is rarely a good idea and selling securities during an economic downturn can often be the worst time to liquidate. Having the cash available gives you options, allows you to maintain your current situation, offers some time to make adjustments should your reduction in income be prolonged and allows you to hold on to your longer term investments to weather the downturn.
If you are in retirement, having a percentage allocation in cash will allow you to maintain your normal distributions without a massive disruption to your overall portfolio. If you are in the accumulation phase of investing, having cash available to invest during market downturns can present significant long term opportunities to buy high quality assets at reduced prices. Simple things like not having to pull back your 401k contribution or continuing to make your regular contribution to your IRA despite the environment can have a profound influence on those accounts over time. Making a lump sum deposit into your investment account, buying an asset that you feel is currently undervalued due to macroeconomic factors, etc. can present longer term opportunities but one must have the cash available in advance of the opportunity. An appropriate allocation to cash can allow you to be opportunistic if your financial situation hasn’t been greatly effected by the environment and you don’t “need” the money for the short term. You have the option and capability of being calm and the luxury of being able to look longer term than those that are scrambling to raise cash any way that they can. Warren Buffett famously said when it comes to investing “Be fearful when others are greedy and greedy when others are fearful”, what he didn’t let us know in the quote is that we have to have adequate cash to remain calm while others are fearful or we may succumb to fear as well and we have to have confidence to deploy the resources when it’s most emotionally difficult to do so. During these times it may be beneficial to have a professional by your side to take out the emotion and help you make high quality decisions.
The bottom line, Cash does indeed Rule Everything Around Me when it comes to the cornerstone of financial planning. Ensuring that you have an appropriate cash allocation could enhance your overall financial well-being by providing optionality during difficult periods. It may also provide you a little bit of peace of mind should you get life altering news or are affected by a severe and immediate downturn in the economic environment. We know that these are difficult times. Please let us know how we can continue to help.
*This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. No strategy assures success or protects against loss. Investing involves risk including loss of principal.*
About the Author:
Kevin W. Meyer is a Financial Advisor at John Bailey Financial.
You can learn more about Kevin here: https://www.johnbaileyfinancial.com/team/kevin-w-meyer
and contact him at firstname.lastname@example.org
Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through JOHN BAILEY FINANCIAL, a registered investment advisor and separate entity from LPL Financial